Dear All:

Well, who won?

The Nobel Prize for Economic Sciences for 2023 was announced today, October 9, 2023. It went to Claudia Goldin.  

Goldin is 77 years old and was born in New York City, NY.  She obtained her B.A. in economics from Cornell University and her Master’s and Ph.D. in economics from the University of Chicago.  Her Nobel-winning work was done mainly while a professor at the University of Pennsylvania.  She is currently the Henry Lee Professor of Economics at Harvard University.

The prize was given “for having advanced our understanding of women’s labour market outcomes”.

So what did she do to make her so Noble?

Rory McElroy, a professional golfer, can hit the ball on average 326 yards.  Polly Mack, a female professional golfer, can hit the ball on average 281 yards.  If we lived in a pure pay-for-skill golf world, you would expect male golfers to be paid more than women golfers.  Of course, this simplifies the matter too greatly.  What about the demand for the product and the revenues that the product generates?  If, in this same world, spectators cared primarily about skill, then male golfers would still be paid more than female golfers.  However, if there was some particular characteristic of female golfing that led to a demand greater than that of male golfing, then female golfers, despite their lower skill, would be paid more than men.

Clearly, this example is too specialized and unrealistic to apply to the myriad of jobs in an economy, however it illustrates that if there is a pay gap between male and female golfers, it does not mean something is wrong with the system or that there is discrimination between men and women.  This example illustrates that in a functioning market, wage gaps or gender gaps can exist.   Making a statement like “We must close the wage gap!” in this context is tantamount to a social welfare program to subsidize one group by the other group.

However, if the driving distance differential was caused by a restriction of females into golf or because women golfers chose to practice less because of family obligations, then the relative skills and hence the relative wages would be affected.

Claudia Goldin spent most of her career studying the behavior of women in the labor force, which included the participation of women in the labor force, as well as the differences in pay between men and women.  During her journey, she spent a considerable amount of time and effort extracting the appropriate data to do her analysis.  Oftentimes in economic research, we do not have sufficient data or we might not have accurate enough data to do a thorough analysis.  This is especially true for economic historians.  By improving the historical data on women in the labor force, she was able to uncover some interesting historical facts.

To understand some of her work, one needs to understand how economic historians use statistics to understand wage differentials.  Suppose data exists on the pay of men and women.  If an economist wants to understand how this pay is affected by various factors, they usually use statistical analysis to explain the pay by observable variables, like people’s education level, people’s years of experience, people’s race, people’s industry, and other items.  For example, if education causes people to be more skilled, and skill is paid a higher wage, then people with a higher education will be paid more.  Thus, if an economist observes that group A is paid more than group B, but also observes that group A has a much higher education than group B, then it might be that the differences in wages are entirely due to education.  This is true for the other variables as well.  Statistical analysis helps tangle out what explains wages and what does not. 

When economists, like Goldin, perform this type of statistical analysis, they often find a statistically significant higher pay for men than women.  In other words, after adjusting for education level, experience, and industry, men are paid more than women.  This alone does not imply discrimination or shenanigans, it only implies that we cannot explain this difference with the variables we have.

One of the many interesting things that Goldin discovered is that during the industrial revolution (1820-1850), the difference in pay between men and women did not seem to be generated by unexplainable factors.  It was ironically, the 1890 to 1930 era that showed slight evidence of a wage gap due to institutional factors.   That is, in the 1820-1850 period, people were paid piecemeal which led to a greater equality in wages.  That is, you made 10 dresses, you got paid for 10 dresses.  This form of pay made it easier to pay people in direct proportion to their productivity. 

In the latter period, the so-called, “white-collar transition”, women were paid less, because pay was based on salary and salary was often based on seniority.  Since women were expected to be in the labor market for a shorter period (childbirth and kids), this affected their relative pay.  That is, there was a benefit to being able to commit long-term to a job and women could  not.

Golding also discovered interesting facts about women labor force participation.  One of the first things that she discovered was that the female participation rate had a U-shaped form.  That is, in the 1790s, roughly 60 percent of women were working in a paying job, then by 1880, this rate had dropped to 10 to 20 percent, and then in modern times, it was back to 60 percent.  Her point was that even with economic growth, there can be other factors that lead to changing women participation in the labor force.

Goldin was also able to find an important connection between expectations and labor force participation dynamics through time.  That is, humans make decisions based on their perceived belief of the future.  Thus, if a woman observes that investing in education has a very low return, she is less likely to make that investment, which then may affect her participation down the road.  Of course, for each generation of humans, there is a different set of future expectations.  That is, women or men’s expectations of the future are constantly changing.  She realized that to understand the measured participation of women in the labor force at any given point in time, one must understand the expectations of all of the different generations at key decision points in their history.  This seems fairly obvious, but gathering the actual data and doing the appropriate empirical work is difficult.

In her historical studies, she did find some periods of history where there were explicit challenges to women’s participation in the labor force, like “hire bars” and “retain bars” which restricted the labor supply of married women.  That is, if you were married, you could not work certain jobs.  These were entirely removed around the 1940s.

She also did some work with well known labor economist, Larry Katz, to show that the invention of the pill allowed women to plan their lives better by making investment choices in education and delaying marriage and pregnancy which consequently impacted their future earnings path and labor force participation. 

As of 2023, the ratio of the average wages of women to men is about 82 percent in the United States.  It varies across countries based on a host of different factors.  For the United States, Goldin’s research with Larry Katz shows this can entirely be explained by parenthood.  That is, women have children, and have a pay-shock as they temporarily exit the labor market from which they never recover.

So what about the Nobel choice?

First, it wasn’t obvious that Claudia Goldin would win the Nobel Prize in Economics (Note:  I don’t speak about my own expectations anymore, because I don’t spend the time to predict anymore.)  Having said that, her dedicated effort and contribution to the understanding of both economic history and labor economics is admirable.

Second, there has been political pressure on the Nobel committee to choose more women.  Some people on my reading list told me that a woman might be part of this year’s award precisely for this reason.

Third, Goldin calls the advances of women in the work place, the “quiet revolution.”  I prefer to call it the “wonderful evolution”.  Markets do occasionally make mistakes and humans occasionally make mistakes, but overall, humans adjust to the environment.  And sometimes, markets are right for the time they are in.  That is, it is conceivable, that a particular historical environment could naturally explain even a massive wage gap without any discrimination or bias.  By reading a summary of Goldin’s work, one can learn about this historical adjustment process of humans and the market over time.  For example, for those that think the pill was a good development for women, it was invented by a man who was asked by a woman to develop such a pill. 

I spoke today to Professor Jim Poterba of MIT who said “This is a terrific prize.  Claudia’s research program on gender disparities in the labor market, which she has pursued with remarkable creativity and diligence for more than forty years, is a model of how knowledge cumulates and new ideas emerge from intense focus.  Claudia’s work has lit the path for other researchers.”

So is that it?

Today, women in the United States, have on average more education than men, institutional mandates are more pro-women than they are pro-men, and the average wage gap between men and women is very small.  We cannot explain this difference with observable factors, but that does not mean it is caused by institutional or human bias.

The labor participation rate of men today is about 68 percent and for women it is about 58 percent.  Some of those women are married women with children.  Although stay-at-home mothers are not counted in official statistics, they are probably some of the hardest and most valuable workers in the world.  In our modern desire to become the next vice president of some random company, we forget that one of the most important roles we have as human beings is to raise our children.  Stay-at-home mothers, in my opinion, have a job that is much more difficult than the job of professional women.  It is not only demanding physically, but it has enormous impacts on the future of our society.  Although Goldin didn’t really lay down any policy advice, I wonder how we,  as a society, could help these women more, including giving women more time at home after child birth, even if it results in a lower average lifetime wage.  I think a lot of women would like this.

I started my blog with a simple and naïve model of skill and pay in the golf world.  The 2022 average driving distance for men and women golfers was 300.57 and 257.14 yards respectively.   If we used my simple golf example where average driving distance was the only criteria for pay, female golfers would be paid about 86 percent of what male golfers would be paid.  In the United States, the actual figure across jobs and industries is 82 percent.

For more information on the winners:

https://www.nobelprize.org/prizes/economic-sciences/2023/press-release/ 

From Harvard:  https://news.harvard.edu/gazette/story/2023/10/harvard-claudia-goldin-recognized-with-nobel-in-economic-sciences/

Congratulations to Claudia Goldin for her fruitful pursuit of knowledge, and the other armies of researchers who walked with her!

Happy Columbus Day!

Ludwig

P.S. Feel free to email me your thoughts and indicate whether you wish them to remain anonymous or not.

P.P.S.  Don’t forget to watch the Silk Nobel Lecture series and sign up for future notifications.  Silk Lecture Videos & www.usfnobel.com 

October 9, 2023